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Dethroning of the U.S. Dollar Will Happen Sooner Than You Think

Currencies / US Dollar Nov 04, 2009 - 11:22 AM GMT

By: Money_Morning

Currencies

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: By now virtually every investor has heard the argument that the U.S. dollar is slated to lose its status as the global reserve currency. And that’s good – as far as it goes.

What’s bad is that many of these investors have yet to latch onto the fact that this could happen much sooner than many people realize and in a manner that will catch most by surprise.


Let’s take a look at the three key reasons that this shift away from the U.S. dollar happening – and sooner rather than later:

1. The Asian Region Currency Partnership: Japan, once the staunchest of U.S. allies, is leading the charge to form a regional currency partnership based on closer ties between itself, China and South Korea. Ostensibly part of the second trilateral “leader’s meeting,” that happened earlier this year, financial cooperation was front and center on the agenda (at Japan’s invitation) as a means of coping with the ongoing global financial crisis and with the subsequent resumption of worldwide financial growth. It was also key to the Association of Southeast Asian Nations (ASEAN) discussions that took place this past weekend – with the waning influence of the U.S. economy again playing a key role in the discussion amongst potential ASEAN trading block partners.

At a time when U.S. leaders are fooling only themselves by pretending this country remains the key player in the health of the worldwide economy, Japan’s newly elected Prime Minister Yukio Hatoyama didn’t mince words following the trilateral meeting when making such comments as “until now we have been too reliant on the United States” and “I would like to develop policies that focus more on Asia” to press-corps attendees.

Having spent 20 years in the region, I can’t say I’m surprised by this development. And you shouldn’t be, either. Between China, South Korea and Japan, we’re talking about 16% of the world’s gross domestic product (GDP) – a figure that’s growing almost daily, by the way.

There are obviously some significant challenges, given the cultural sensitivities that remain in the region as a result of World War II. But even those are being trumped by today’s serious global financial demands. After the three-nations met, Chinese Prime Minister Wen Jiabao noted that “we have agreed to seek common ground and shelve our differences.”

In a column written from my family home in Japan earlier this year, I noted how important it is to “read between the lines” when investors are attempting to decode English-language statements being made by officials in Japan or China. It’s not what’s actually being said – at least, not as Westerners hear it – that’s important. That’s actually been shifted a bit by the translator. You really have to go back and make an effort to see just what it was the official actually meant.

Granted, that’s not the easiest of exercises. But it does force you to really look at what’s taking place – which will usually give you a much-more accurate picture than if you just trust what’s said by the Western press.

So Wen Jiabao’s statement can be construed as it’s “time to get down to business.”

2. When “Black Gold” is No Longer Quoted in Greenbacks: Middle Eastern nations and members of the Organization of the Petroleum Exporting Countries (OPEC) finally couldn’t contain themselves any longer and leaked information a few weeks back that they’re pursuing a non-U.S. dollar trading basket as a replacement for the current U.S. dollar-traded oil markets.

We’ve been forecasting this for some time. The difference this time around is that the Middle Eastern nations are now all but openly in cahoots with China, Russia, Japan and France – all of whom the United States continues to blithely believe it can outmaneuver.

While the meetings have been held in secret, my sources in Hong Kong and the Persian Gulf region suggest that the move is imminent and that the establishment of an independent trading market is all that’s keeping us from a day in which oil prices are no longer quoted in dollars. Oil will instead trade in the combined basket using currencies from the nations I just mentioned. Led by China and potentially – although this is a big leap – tied in good measure to the yuan.

As a side note, this may at least partially explain the rise in gold prices as enlightened traders begin to hedge the dollar’s ultimate demise. This makes sense for two reasons:

  • First, China uses oil in an incrementally greater proportion than the United States because it remains less energy efficient. That means that China will take in an increasingly larger percentage of world supplies.
  • Second, gold is the only “currency” that is potentially liquid enough to serve as a transitional store of value until the new currency basket arrives. Pun absolutely intended.

Incidentally, you can expect Brazil and India to join the party shortly, leaving the United States even further out in the cold. And while we’re at it, my guess is that the new oil markets will be based in Shanghai, and not in New York or Chicago.

Watch, too, as the United Kingdom is dragged – kicking and screaming – to the euro because it will have no choice but to abandon the U.S. dollar.

3. U.S. Firms Are Already Adopting a China Focus: While ostensibly supporting the recovery here, major U.S. companies are already looking at what it will take to list their shares on China’s stock exchanges. Although I’ve been following this story for at least two years, it’s received almost no attention in the U.S. news media. When it does happen – and it will – this will be one of the biggest wakeup calls yet for those Western investors who refuse to acknowledge Asia’s economic ascendance.

I’m not talking about fringe companies here, either. I’m talking about stalwarts like Wal-Mart Stores Inc. (NYSE: WMT), The Coca-Cola Co. (NYSE: KO), and General Electric Co. (NYSE: GE), to name just a few. In short, companies that U.S. investors view as American as apple pie are pushing to be viewed as Asian as quickly as possible.

I originally thought this wouldn’t happen for five to seven years (which is still faster than most investors believed possible). Instead, I give this shift 12 months to 24 months – at most – before we see the first listings.

The fallout from this will be considerable. The historic financial centers of London and New York will take yet another step to the sideline as new Asian markets emerge.

To some, this will sound like scary stuff. But uncertainty breeds opportunity. And savvy investors will welcome the changes because there will be a fascinating fallout that almost no one is talking about.

The emergence of Asia as a true global financial center will make it so much easier to raise capital in that part of the world. All this new Asian capital will likely lead to a new golden age of investing – certainly in Asia, but also in the United States and Europe to the extent that companies that pursue these listings will have newfound sources of capital to buttress their balance sheets.

Not all companies will be regarded equally, however. For investors, the best choices will be those companies that can immediately use the money they raise through Chinese offerings to enhance their global operations, increase worldwide sales, and cement their relationships with sources of Asian capital.

So if there’s one key take away in all this, it’s this to paraphrase the words of American writer Ruth E. Renkel: “Don’t fear shadows – they simply mean there’s a light shining somewhere nearby.”

Money Morning/The Money Map Report

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